When trading foreign exchange, you are quoted a dealing spread offering you a buying and a selling level for your trade. Once you accept the offered price and receive confirmation from our dealers, the trade is done. There is no need to call an exchange floor. There are no other time-consuming delays. This is possible due to live streaming prices, which are also a great advantage in times of fast-moving markets: You can see where the market is trading and you know whether your orders are filled or not.
The dealing spread is typically 3-5 points in normal market conditions. This means that you can sell US dollars against the euro at 1.7780 and buy at 1.7785. There are no further costs, commissions or exchange fees.
This ensures that you can get in and out of your trades at very low slippage and many traders are therefore active intra-day traders, given that a typical day in USDEUR presents price swings of 150-200 points
Saturday, April 4, 2009
Base Currency and Variable Currency
When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell euro. Or buy euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening in relation to the other.
The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD credited and debited for the two transactions. In other words, your profit or loss will be denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.
The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD credited and debited for the two transactions. In other words, your profit or loss will be denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.
Margin Trading
Foreign exchange is normally traded on margin. A relatively small deposit can control much larger positions in the market. For trading the main currencies, Saxo Bank requires a 1% margin deposit. This means that in order to trade one million dollars, you need to place just USD 10,000 by way of security.
In other words, you will have obtained a gearing of up to 100 times. This means that a change of, say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit. See below for specific examples. As you can see, this calls for a very disciplined approach to trading as both profit opportunities and potential risks are very large indeed. Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions.
In other words, you will have obtained a gearing of up to 100 times. This means that a change of, say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit. See below for specific examples. As you can see, this calls for a very disciplined approach to trading as both profit opportunities and potential risks are very large indeed. Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions.
Forex Trading Basics
The global foreign exchange market is the biggest market in the world. The 3.2 trillion USD daily turnover dwarfs the combined turnover of all the world's stock and bond markets.
There are many reasons for the popularity of foreign exchange trading, but among the most important are the leverage available, the high liquidity 24 hours a day and the very low dealing costs associated with trading.
Of course many commercial organisations participate purely due to the currency exposures created by their import and export activities, but the main part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains predominantly the domain of the big professional players in the market - funds, banks and brokers. Nevertheless, any investor with the necessary knowledge of the market's functions can benefit from the advantages stated above.
There are many reasons for the popularity of foreign exchange trading, but among the most important are the leverage available, the high liquidity 24 hours a day and the very low dealing costs associated with trading.
Of course many commercial organisations participate purely due to the currency exposures created by their import and export activities, but the main part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains predominantly the domain of the big professional players in the market - funds, banks and brokers. Nevertheless, any investor with the necessary knowledge of the market's functions can benefit from the advantages stated above.
Glossary
• Appreciation An increase in the value of a currency.
• Ask The price requested by the trader. This usually indicates the lowest price a seller will accept.
• Base currency The currency that the investor buys or sells (i.e. EUR in EURUSD).
• Bear Someone who believes prices are heading down. A bear market is one in which there has been a sustained fall in prices and which does not look like it will recover quickly.
• Bid The price offered by the trader. This usually indicates the highest price a purchaser will pay.
• Bid/Ask The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.
• Bull Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying.
• cross When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD.
• Cross rate An exchange rate that is calculated from two other exchange rates.
• Depreciation/decline A fall in the value of a currency.
• Exchange rate What one currency is worth in terms of another, for example the Australian dollar might be worth 58 US cents or 70 yen.
Currencies traded freely on foreign-exchange markets have a spot rate (applying to trades settled “spot”, i.e., two working days hence) and a forward rate. Countries can determine their exchange rates in a variety of ways.
1. A floating exchange rate system where the currency finds its own level in the market.
2. A crawling or flexible peg system which is a combination of an officially fixed rate and frequent small adjustments which in theory work against a build-up of speculation about a revaluation or devaluation.
3. A fixed exchange-rate system where the value of the currency is set by the government and/or the central bank.
• EURUSD Means that you trade EUR against dollars. If you buy euro you pay in dollars and if you sell euro you receive dollars.
• FX, Forex, Foreign Exchange All names for the transaction of one currency for another, e.g. you buy GBP 100.00 with USD 150.25 or sell USD 150.25 for GBP 100.00.
• Interbank Short-term (often overnight) borrowing and lending between banks, as distinct from a banks business with their corporate clients or other financial institutions.
• Interest rate differential The yield spread between two otherwise comparable debt instruments denominated in different currencies.
• Leverage (gearing) The investor only funds part of the amount traded.
• Long To buy.
• Long position A position that increases its value if market prices increase.
• Liquid (-ity) The capacity to be converted easily and with minimum loss into cash. A liquid market is one in which there is enough activity to satisfy both buyers and sellers. Ultra-short-dated treasury notes are an example of a liquid investment.
• Margin The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary.
• NYSE The New York Stock Exchange.
• Open position A position in a currency that has not yet been offset. For example, if you have bought 100,000 USDJPY, you have an open position in USDJPY until you offset it by selling 100,000 USDJPY, thus “closing” the position.
• Over the counter When trading takes place directly between two parties, rather than on an exchange. Over the counter trades can be customised whereas exchange-traded products are often standardised.
• Pips A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.
• Position Traders talk of “taking a position” which simply means buying or selling currency cross. “Position” can also refer to a trader's cash/securities/currencies balance, whether he or she is short of cash, has money to lend, is overbought or oversold in a currency, etc.
• Risk Trying to control outcomes to a known or predictable range of gains or losses. Risk management involves several steps which begin with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business. Then an assessment should be made of the types of variables that can affect the business and how best to protect against unwelcome outcomes. Consideration must also be given to the preferred risk profile – whether one is risk – averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk and whether a natural hedge exists that can be used. Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.
• Secondary currency (variable currency or counter currency) The currency that the investor trades the base currency against (i.e. USD in EURUSD).
• Short position A position that benefits from a decline in market prices.
• Short To sell.
• Speculative Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need.
• Spot A Spot rate is the current market price of an asset.
• Spot market The part of the market calling for spot settlement of transactions. The precise meaning of “spot” will depend on local custom for a commodity, security or currency. In the UK, US and Australian foreign-exchange markets, “spot” means delivery two working days hence.
• Spread The difference between the bid and the ask rate.
• Ask The price requested by the trader. This usually indicates the lowest price a seller will accept.
• Base currency The currency that the investor buys or sells (i.e. EUR in EURUSD).
• Bear Someone who believes prices are heading down. A bear market is one in which there has been a sustained fall in prices and which does not look like it will recover quickly.
• Bid The price offered by the trader. This usually indicates the highest price a purchaser will pay.
• Bid/Ask The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.
• Bull Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying.
• cross When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD.
• Cross rate An exchange rate that is calculated from two other exchange rates.
• Depreciation/decline A fall in the value of a currency.
• Exchange rate What one currency is worth in terms of another, for example the Australian dollar might be worth 58 US cents or 70 yen.
Currencies traded freely on foreign-exchange markets have a spot rate (applying to trades settled “spot”, i.e., two working days hence) and a forward rate. Countries can determine their exchange rates in a variety of ways.
1. A floating exchange rate system where the currency finds its own level in the market.
2. A crawling or flexible peg system which is a combination of an officially fixed rate and frequent small adjustments which in theory work against a build-up of speculation about a revaluation or devaluation.
3. A fixed exchange-rate system where the value of the currency is set by the government and/or the central bank.
• EURUSD Means that you trade EUR against dollars. If you buy euro you pay in dollars and if you sell euro you receive dollars.
• FX, Forex, Foreign Exchange All names for the transaction of one currency for another, e.g. you buy GBP 100.00 with USD 150.25 or sell USD 150.25 for GBP 100.00.
• Interbank Short-term (often overnight) borrowing and lending between banks, as distinct from a banks business with their corporate clients or other financial institutions.
• Interest rate differential The yield spread between two otherwise comparable debt instruments denominated in different currencies.
• Leverage (gearing) The investor only funds part of the amount traded.
• Long To buy.
• Long position A position that increases its value if market prices increase.
• Liquid (-ity) The capacity to be converted easily and with minimum loss into cash. A liquid market is one in which there is enough activity to satisfy both buyers and sellers. Ultra-short-dated treasury notes are an example of a liquid investment.
• Margin The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary.
• NYSE The New York Stock Exchange.
• Open position A position in a currency that has not yet been offset. For example, if you have bought 100,000 USDJPY, you have an open position in USDJPY until you offset it by selling 100,000 USDJPY, thus “closing” the position.
• Over the counter When trading takes place directly between two parties, rather than on an exchange. Over the counter trades can be customised whereas exchange-traded products are often standardised.
• Pips A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.
• Position Traders talk of “taking a position” which simply means buying or selling currency cross. “Position” can also refer to a trader's cash/securities/currencies balance, whether he or she is short of cash, has money to lend, is overbought or oversold in a currency, etc.
• Risk Trying to control outcomes to a known or predictable range of gains or losses. Risk management involves several steps which begin with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business. Then an assessment should be made of the types of variables that can affect the business and how best to protect against unwelcome outcomes. Consideration must also be given to the preferred risk profile – whether one is risk – averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk and whether a natural hedge exists that can be used. Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.
• Secondary currency (variable currency or counter currency) The currency that the investor trades the base currency against (i.e. USD in EURUSD).
• Short position A position that benefits from a decline in market prices.
• Short To sell.
• Speculative Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need.
• Spot A Spot rate is the current market price of an asset.
• Spot market The part of the market calling for spot settlement of transactions. The precise meaning of “spot” will depend on local custom for a commodity, security or currency. In the UK, US and Australian foreign-exchange markets, “spot” means delivery two working days hence.
• Spread The difference between the bid and the ask rate.
Further Reading
To see how you can trade the Forex market and benefit from our toolbox of information and live quotes, please proceed to the Forex Quick Start found under the Trading menu of SaxoTrader.
Trading Scenario – Trading Falling Prices
If, on the other hand, you believe that the euro will weaken against the dollar, you'll want to sell EURUSD.
• You sell euro We quote EURUSD at a Bid price of 0.9875 and Ask price of 0.9880 and you decide to sell euro 100,000 at a Bid price of 0.9875.
• The market moves in your favour The euro weakens against the dollar and the EURUSD is now quoted at bid 0.9744 and ask 0.9749.
• Now you buy back your euro You buy EUR at an ask price of 0.9749.
• Your profit/loss is then Sell price-buy price x size of trade
(0.9875 minus 0.9749) multiplied by 100.000 = USD 1260 Profit
Remember that trading EUR 100,000 as we have done in our examples, does not mean that you have to put up euro 100,000 yourself. On a 2% margin means that you have to deposit 2.0% of euro 100,000, which is euro 2,000 on margin as a guarantee for the future performance of your position.
• You sell euro We quote EURUSD at a Bid price of 0.9875 and Ask price of 0.9880 and you decide to sell euro 100,000 at a Bid price of 0.9875.
• The market moves in your favour The euro weakens against the dollar and the EURUSD is now quoted at bid 0.9744 and ask 0.9749.
• Now you buy back your euro You buy EUR at an ask price of 0.9749.
• Your profit/loss is then Sell price-buy price x size of trade
(0.9875 minus 0.9749) multiplied by 100.000 = USD 1260 Profit
Remember that trading EUR 100,000 as we have done in our examples, does not mean that you have to put up euro 100,000 yourself. On a 2% margin means that you have to deposit 2.0% of euro 100,000, which is euro 2,000 on margin as a guarantee for the future performance of your position.
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